BRANDON ZIETSMAN: Why human advisers will always have a role
Direct-to-client "robo-advice" has received a lot of airtime and encompasses a broad range of offerings. In certain circumstances, it fills a vacuum.
The issue of access to advice is worrying, because the cost of servicing clients has soared with regulation. Although this has driven professional standards higher, many ordinary South Africans have been left stranded because advisers are forced to focus on fewer, higher-value clients. Cheaper robo-advice may be a force for good by filling this gap.
However, direct-to-client offerings tend to involve discrediting real human advisers by, for example, illustrating the impact of fees on investment values. In fact, the advocates of robo-services fail to assign any value to advice whatsoever.
I have worked with good advisers in various capacities for most of my career and worry about the impact of sensational marketing.
I don't believe robo-advice will ever come close to achieving the heights that its proponents believe it will.
Several years ago, a couple of fledgling firms in the UK and US with direct-to-client "robo" business models were getting a lot of publicity and attracting eye-watering sums of private-equity cash. We, as an investment management firm with a big investment in technology, were ideally placed to enter that market. We didn't, for one very good reason.
Quite simply, I had - and still have - little faith in business models that cut out good, human advisers.
Why the scepticism?
• The robo "advice" models we investigated were simplistic, linear, unable to capture nuance and were too easy to replicate, offering no real barrier to entry;
• These firms grossly underestimated the costs of acquiring clients and would run out of cash before reaching critical mass;
• The offerings were more likely to attract new money at the margin and would have little impact on converting the existing "stock" of wealth; and
• Investment management is about trust and credentials. A basic range of multi-asset passive portfolios was always going to have narrow appeal.
This all smacked of bleeding edge, rather than leading edge.
But this all still misses the main point: the idea that a robo-adviser is a substitute for a human is flawed. It reflects a limited appreciation of what good advisers actually do and what investors receive in return.
An adviser's knowledge of investments, tax and estate planning is simply a prerequisite to play - andis in fact peripheral. As a client, you buy an adviser because you can engage with them. People empathise with people - that's why great advisers have a high emotional quotient, are intuitive and are better able to engender trust. Advisers are human. They are not immune to fear, and harbour hope and aspirations. Trust starts with rapport.
But where are the actual rands and cents in this? As it happens, there are granite-hard reasons why, as a client, you should be willing to pay for advice.
The other bits
In my 25 years in investments, I am convinced that investor behaviour is overwhelmingly the biggest factor that drives long-term success, dwarfing fees and even moderate underperformance.
It takes very little for investors to deviate from a strategy - and most systematically overestimate their ability to sit on their hands.
Ill-timed interventions can be driven by fear but also by an instinct to take matters "firmly in hand". It is human nature to oversimplify things, and the required action is seldom that obvious.
Exiting markets after sustaining losses and only reinvesting after they have rebounded rubbishes all projections - these are big, hard hits that are difficult to recover from.
Investor behaviour explains the enormous gap between the published performance of unit trusts and actual returns in the hands of investors. This behaviour eclipses the cost of good advice.
Advice is not just for people with a limited grasp of investments - it's often clever professionals who need the most protection from themselves!
Humans have another critical advantage over machines. It's the way we think and interact. We do things intuitively, and that is hard for machines to cope with. Humans can extract subjective information from a client in a way that no machine ever can. Often, investor needs are not well articulated and need to be interrogated or inferred; hard facts need to be blended with preferences - it requires instinct, judgment and experience.
Technology and artificial intelligence are going to change the world, and we haven't even begun to quantify the full social impact. However, I feel that good advisers have almost the least to fear.
Every good adviser should be thinking: "Which bits of what I do could a machine do better?" Then they should focus on the other bits.
• Zietsman is the CEO and head of investments of asset manager PortfolioMetrix